Chapter

8 Privatization in Jordan

Editor(s):
Saíd El-Naggar
Published Date:
June 1989
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Author(s)
Jawad Anani and Rima Khalaf 

Privatization has acquired an increasing degree of importance in Jordan since 1985. It is considered a part and an indicator of the “new economic direction.” Since its inception, it has been at the center of public attention. The institutions targeted for privatization were the Telecommunications Corporation, the Public Transport Corporation, and the Royal Jordanian Airline. Most of the debate in the media did not deal in depth with the issue of privatization as such, but basically revolved around the merits and demerits of privatizing those particular institutions. However, by extrapolating from what had actually surfaced in the media, the idea of privatization was accepted and in many cases welcomed as a sign of a freer economy. This paper will elaborate on the rationale for privatization in the light of an assessment of the extent of the public sector in the country. It will evaluate the performance of public enterprises and discuss constraints on their successful operation. Finally, after a brief account of problems encountered in privatization, a privatization plan will be recommended.

The Rationale for Privatization

The Government of Jordan announced officially in 1986 its intention to pursue privatization in the country when it established a special privatization committee at the ministerial level. This committee was entrusted with the evaluation of privatization proposals whether in the form of transferring control of public enterprises to the private sector or in the form of introducing private sector management techniques to public sector enterprises.

One major factor behind the revival of private sector-oriented policies was the recessionary conditions prevailing in the country since 1983. During the period 1983–86, annual growth in gross domestic product (GDP) averaged less than 3 percent in real terms. Given the high population growth rate of over 3.5 percent annually, this necessarily meant a drop in the standard of living and general well-being in the country. In addition, private investment started to suffer owing to the general economic outlook perceived by private entrepreneurs. The decline in private gross fixed capital formation started in 1983 but accelerated rapidly during the years 1986 and 1987, and preliminary estimates indicate that it dropped by over 20 percent annually in each of those two years. In 1987 it reached its lowest level in the decade of the eighties.

This economic slowdown was largely caused by the depressed economic conditions in the oil exporting countries of the Gulf Corporation Council (GCC) as a result of the sharp drop in oil prices. Jordan is linked to GCC economies in more than one respect. Over one third of the Jordanian labor force is employed in GCC countries. Their remittances amounted to JD 475 million in 1984 and were equivalent to almost two thirds of Jordan’s total proceeds from exports of goods and nonfactor services. Budget support by GCC countries was equivalent to one half of the Government’s domestic revenues in 1983. Moreover, Jordan’s exports to Arab countries represent on average about half of the country’s total merchandise exports. Accordingly, the slowdown in GCC economies affected more than one account in the Jordanian economy. As exports to Arab countries declined, they compounded the contractionary impact of reduced domestic aggregate demand on commodity production. And as the absorption of Jordanian laborers in the markets of neighboring countries stopped increasing, it aggravated the domestic unemployment problem as it reached its current level of 8 percent, compared with less than 3 percent in 1980. And with the dwindling of official budget support, the Government’s deficit became unsustainable.

It is within the context of such economic conditions and in the absence of indicators for their automatic reversal in the medium term that the thinking on privatization in the country was shaped. Government officials believed that the only viable strategy for recapturing the growth momentum was through the revitalization of the role of the private sector. Accordingly, the privatization strategy as outlined in a government official paper submitted to an international development conference in 1986 comprised two components. The first was increasing autonomous private investment through deregulating the business environment in which the private sector operates. The second was trimming public involvement in commercial activities through the actual sale of assets to private entrepreneurs. Such a drive toward privatization is based on a number of rational arguments.

One of these arguments is that privatization implies rationalization. Privatization entails cutting down unnecessary expenditures and enhancing productivity. Although there is a complaint that government-owned enterprises are not as efficiently run as those in the private sector, there is no clear-cut empirical evidence to support such a statement in the case of Jordan. While there are clear indications that testify to better management in privately owned and managed organizations, evidence to the contrary is also available. However, empirical data collected by the authors on Jordan indicate beyond doubt that government equity shows a very small return, which is also declining over time. In contrast, the opportunity cost of maintaining such funds exceeds 7 percent, while the return barely averages 3 percent. Thus, the Government is well advised to sell its equity. Moreover, in government-owned institutions and in investments where the Government holds a substantial equity, overemployment resulting from sociopolitical pressures exists. In addition, the Government guarantees international loans and domestic corporate bonds issued in favor of such investments. Under such conditions, the public budget’s direct and indirect support for these institutions increases over time in the face of shrinking returns.

Privatization is considered an integral part of the Government’s plan to decentralize, deregulate, and bring the economy as close as possible to free enterprise. While it is stated in Jordan’s Constitution that the economy shall be run in accordance with “private initiative,” the last fifteen years in particular have witnessed a deviation from this rule. But the trend was dictated by prevailing circumstances rather than resulting from a deliberate thought-through plan. A series of cumulative ad hoc decisions dictated by responses to the emerging situation buttressed this overgovernmentalization process. Among the salient factors was the sudden increase in the Government’s ability to beef up its revenues from both foreign and domestic sources, particularly during the oil boom decade of 1974–83. Both Arab aid and international easy credit made it possible for the Jordanian Government to increase its expenditures on infrastructural projects and social overhead schemes.

Yet the 1974–83 years revived the traditional role played by the Government as both the social benefactor to the underprivileged and the adjuster of short-run cyclical trends in the economy. The rising rates of inflation were countered by a series of income policies in the areas of investment and consumption. Needed investments not undertaken by the private sector were immediately carried out by the Government in tourism, industry, agriculture, transportation, and particularly in large mining projects. In the field of consumption, the Government created the Ministry of Supply, the Civil Service Consumer Corporation, and other activities, in an attempt to mitigate the effect of the rising cost of living on government employees. The key factor forcing the Government to reconsider this large expenditure is the decline in its ability to raise domestic funds, its ability to wield foreign loans at rising costs, and the need to invite the private sector to shoulder its responsibility in the face of rising unemployment—which is approaching 15 percent and threatens to grow faster in the future.

There are certain inherent problems that inhibit the Jordanian economy, and as the year 2000 approaches, these problems are becoming acute. The annual natural growth rate in population is 3.8 percent, second only to Kenya, according to statistics from the United Nations Fund for Population Activities. This rise in population is skewing the distribution in favor of the young. What strains the situation even further is the concentration of population in the Amman-Zarka region, which currently accommodates 60 percent of the country’s population in an area that barely exceeds 3.5 percent of the total area. This situation entails a double burden: the cost of overcrowdedness, and the diseconomy of undercrowdedness in the outlying areas. Moreover, the distribution of the main natural resources is in sharp contrast to that of the population. With infrastructure in place, the task of redistributing the population should fall on the initiative of the private sector to take an active role in the economic process.

Within the macro picture, it must also be emphasized that the Government’s active role has succeeded so far in realizing quantitative achievements. Yet for the economy to take off, it must achieve two major goals: first, increasing the level of investment to create more jobs, and second, alleviating pressures on the balance of payments by strengthening export potential. These two objectives cannot be achieved except by two major undertakings. The first is to enhance Jordan’s comparative advantage by utilizing its abundant endowment of human capital, and the second by allowing the free interplay of economic forces to sharpen competitiveness by improvements in quality.

Such a course of action would necessarily involve a division of labor between the private and the public sectors. The Government must direct its attention toward improving its administration and raising the quality of education, health, and other social services. The private sector should engage in profitable investments that can meet foreign competition both at home and abroad. Within such a framework, it seems only plausible that the Government should adopt a privatization, deregulation, and decentralization scheme.

Extent of the Public Sector in Jordan

The extent of public sector involvement in economic activity in Jordan can be captured by analyzing two different spheres of intervention. The first is the direct involvement of the public sector in economic activity through the actual production of goods and services. This may actually be conducted by integral government departments or by public institutions enjoying administrative and financial autonomy. The second is public participation in productive activity through equity shareholding by the Central Government or public institutions in domestic corporations.

Direct Provision of Goods and Services

For equity and developmental considerations, the public sector has expanded its role in the provision of public goods and services. The adequate and equitable provision of certain basic services in such fields as health and education has received increased attention, particularly in the light of the demographic characteristics of the country, where over 50 percent of the population is less than 15 years old. Accordingly, integral government departments have a conspicuous presence in the provision of health, education, and infrastructural services. The Ministry of Education accounts for 75 percent and 95 percent of all compulsory and secondary students in the country, respectively. This trend is reversed, however, in technical education at the community college level. Private colleges provide training for 75 percent of total college students in Jordan.

As for health services, the public sector employs about 60 percent of the doctors in Jordan and provides 72 percent of the total number of hospital beds. In addition, investment in infrastructure was extensively undertaken. Such infrastructure services, however, although provided by the Government, are actually produced by the private sector.

Autonomous public institutions are relatively limited in Jordan and are concentrated in three sectors: water and electricity, transport and communication, and higher education. In some sectors and subsectors, such enterprises enjoy a monopoly status. This is particularly true of the water, electricity generation, and telecommunication services. On the other hand, the basic commodity-producing sectors of agriculture and industry are almost free of such enterprises.

The profitability of public institutions varies significantly between one enterprise and another. Some, like the Telecommunications Corporation and the Electricity Authority, are considered profitable. And although some are loss-makers owing to inefficient operation, others (such as the Water Authority) incur planned losses for equity purposes manifested in the pricing of their services at much lower than the cost of production.

Equity Shareholding

Public participation in the capital of domestic companies is undertaken by the Central Government and by a number of autonomous public institutions such as the Pension Fund and the Social Security Corporation. The Central Government currently holds shares in 31 domestic companies with a total par value of JD 90.7 million. This represents 32.2 percent of the subscribed capital of these joint ventures. In addition, it is a partner in a number of Pan Arab joint ventures operating in various Arab countries including Jordan. As for the Pension Fund, its equity is in 48 companies in different economic sectors. The par value of the Fund’s shares amounts to JD 37.2 million, the largest portion of which is invested in the manufacturing sector where it reaches JD 13.38 million. The Social Security Corporation’s total investment stands at present at JD 214 million, about 10 percent or JD 25 million invested in the shares of Jordanian corporations.

In general, the total share of the public sector in Jordanian joint ventures is not negligible when equity shareholdings for the two financial institutions—the Pension Fund and the Social Security Corporation—are added to that of the Central Government. The three together own one fourth of the total capital of shareholding corporations in the country. The public sector’s largest holding in absolute and relative terms is in mining, where total public investments amount to 58 percent of the capital of mining companies and represent almost one half of total public shareholdings in Jordanian corporations. The high capital-intensive nature of mining companies and the perception that natural resources are a national wealth are two factors behind this large participation.

The second largest participation is in the manufacturing sector, where participation reaches 23.2 percent of the sector’s capital. Actually, 87 percent of public shares are held in the four largest companies: the Jordan Cement Factories, the Jordanian Petroleum Refinery, the Glass Industries, and the Engineering Industries. The subscribed capital of those four companies reaches JD 102 million and represents 56 percent of the total capital of all 48 manufacturing companies.

In services, average public investment amounts to 20.8 percent of the total capital of service companies. This percentage will increase slightly if the shareholding of the Electricity Authority (an autonomous public institution) in the two electricity distribution companies is added. Unlike manufacturing, where total public participation of less than 1 percent exists in a number of companies, public participation in all service joint ventures is significant, reaching 15 percent or more for 18 out of the 21 companies in which the public sector participates.

In the insurance sector, public shareholding is negligible, and in the banking sector it does not exceed 2.2 percent. The public sector’s investments in banking institutions are concentrated in the Industrial Development Bank and the Housing Bank.

With regard to the profitability of mixed enterprises, some are profitable and others cost the Government significant amounts in terms of transfers and forgone profits. Of 46 mixed enterprises, 17 incurred losses in 1986, and they represented 37 percent of all joint ventures. During the same year, 32 of 76 pure private enterprises incurred losses and they represented 42 percent of all private enterprises listed in the Amman financial market. And while 36 percent of private enterprises achieved a return on investment of less than 3 percent, 43 percent of mixed enterprises registered a similar return. A rate of return on investment of more than 5 percent was achieved by 21 percent of pure private companies, and by 20 percent of mixed enterprises. In brief, the performance of mixed enterprises varies widely from one company to another but no significant difference between the performance of mixed and private enterprises can be established. However, within the mixed enterprises sector, it was noted that the higher the government participation, the higher the probability of having a loss-making industry. In fact, 58 percent of mixed enterprises with a public participation rate of 35 percent or more were loss-makers in 1986. The comparable figure for enterprises with less than 35 percent public ownership was only 26 percent.

Constraints on Successful Public Enterprises

Pure public enterprises and public-private joint ventures vary widely in their productivity and efficiency. A number of them were identified as successful, given various performance measures. Nevertheless, some pure public enterprises suffer from acute deficits, and some mixed enterprises have sustained losses at the expense of private shareholders and the taxpayers at large. The dearth of empirical and analytical research on the functioning of those enterprises makes it difficult to draw a conclusion about the constraints that hinder improved performance. However, a number of the prevailing constraints can be summarized as follows.

Overstaffing and Recruitment Policies

Most autonomous public enterprises suffer from adherence to civil service norms, rules, and regulations, and from a rigid pay scale. It is difficult for them to recruit high-caliber professionals because of their inability—or extreme difficulty—to afford the services of such professionals. On the other hand, many are overstaffed because of social and political factors which inhibit laying off workers. As a result, most enterprises end up having too many workers that they do not need, and too few professionals that are necessary for their efficiency and productivity.

Government Pricing Regulations

Another problem that faces a number of enterprises undertaking commercial activities is the intervention of the Central Government in pricing their products. This is true for almost every enterprise such as the Water Authority, the Electricity Authority, the electricity distribution companies, and the Public Transport Corporation. Although some price regulations are legitimate because the Government is pricing what it classifies as social goods and necessities, other regulations are perceived to be unnecessary and detrimental to the efficient operations of the enterprise. The Government, for example, requires Royal Jordanian Airline to give a 25 percent discount for government employees and a 50 percent discount for ambassadors and retired army personnel and their families.

Weak Systems of Control

Financial and management control systems are inadequate in many enterprises if they exist at all. To establish the pervasiveness of such a constraint would require an in-depth analysis of the operations of each enterprise, something that is not available and would be difficult to carry out. In general, however, all public enterprises suffer from the absence of clear and reasonable goals for managers and operators, which in turn results in the absence of measures to monitor performance.

Weak System of Incentives

Most public enterprises do not possess the ability to offer discretionary incentives to their employees. The only material incentive offered in some enterprises is a bonus, equivalent to two months earnings, given each year to every employee. This incentive has become standard practice for those enterprises and is not made conditional on performance. As a result, such a bonus does not affect the efficiency of employees and hence that of the enterprise itself.

Inadequate Accounting Systems

The accounting practices of public enterprises as embodied in their accounting systems do not in general give an accurate feedback to the management of those enterprises on their financial performance, which in turn makes it difficult for management to intervene as necessary to improve operations. Capital procurement is carried out mainly through the Central Government, either from local sources or from concessionary foreign financing. In both cases the cost of capital is understated as the real opportunity cost is much higher than the nominal cost. This fact not only distorts the readings of the enterprises performance but may also cause misallocation of future investments.

Absence of Systematic Monitoring

The previous section has shown that equity shareholding by the public sector is equivalent to over 20 percent of the capital of all corporations registered on the Amman financial market. The Central Government and its two financial institutions participate in over sixty companies and have representatives on the boards of directors of almost all of them. Nevertheless, there is no systematic monitoring of these enterprises and no quantitative analysis of their performance. Representatives on boards of directors are appointed on a political rather than on a technical basis. This should pose no problems if those representatives have the backing of a qualified monitoring unit which can obtain, process, and analyze the performance of those enterprises and provide feedback to representatives. The absence of such a technical monitoring unit hinders to a large extent the adequate and proper intervention by government representatives on the boards of directors of such enterprises, by obscuring the real problems of such enterprises.

The Privatization Experience

Since 1986, when privatization was declared a desirable objective of economic policy in Jordan and an effective means of growth, considerable progress has been made toward implementation, although no actual transfer of ownership from the public to the private sector has taken place. An initial survey of public enterprises in Jordan was conducted in 1986 with the object of assessing privatization prospects in the country. The study identified three enterprises as targets for privatization and recommended further detailed studies on each of them to work out the actual implementation programs. Those enterprises were the Royal Jordanian Airline, the Public Transport Corporation, and the Telecommunications Corporation. Other candidates reviewed by the study, such as the Port of Aqaba, appeared to offer less potential given current industrial and economic conditions. Detailed studies were conducted on the privatization prospects for each of them, and the prerequisite preparatory steps were determined. Before the Public Transport Corporation is privatized, the whole public transport sector has to be reformed. This requires the design of a new comprehensive route network and the establishment of a public transport authority. Royal Jordanian Airline had to refurbish its image and undertake capital restructuring through selling and leasing back its aircraft. The Telecommunications Corporation was to start reforming its management and accounting structures, which it is currently doing in a commercialization phase to precede privatization.

The privatization experience in Jordan is still limited to commercialization of public enterprises. So far no serious thought has been given to the trimming of public shareholdings in domestic corporations.

Problems Encountered in Privatization

Privatization attempts in Jordan have so far focused on commercialization of public enterprises as a preparatory step for the transfer of control of those enterprises from the public to the private sector. Even with this limited experience, a number of problems have surfaced, posing serious constraints to the privatization schemes that are currently in progress. Some of those problems are enterprise specific, but others are general in nature and apply to almost all privatization attempts in the country.

Legal Problems

Any sale of a public enterprise by the executive authorities in the country will necessarily require legal backing by the legislature. Yet there is no law or provision in the Constitution that can allow such a sale. Accordingly there will be a need to enact new laws to enable the Cabinet to undertake such a transfer of ownership before privatizing any autonomous public institution. A law that empowers the Prime Minister or the Cabinet to sell government assets in general does not seem to be a plausible solution, as it is perceived to submit too much authority to the executive branch. Accordingly, the only viable solution may be to produce a special law for each and every government enterprise that is to be privatized.

Economic Recession

The second problem that will have a constraining effect on the actual sale of shares of public institutions or even the shares that the public sector holds in domestic corporations is the current economic recession. Since 1983, the country has been witnessing a marked decrease in economic activity. Growth rates dropped from their two-digit levels in the late seventies to about 6 percent in the first two years of the eighties and to less than 3 percent on average for the period 1983–87. This has negatively affected the profitability of most enterprises and corporations in which the Government holds shares. As a result, the attractiveness of the shares of such enterprises to the potential investor has been significantly reduced, thereby decreasing the probability of success for any potential flotation of shares. The recession has influenced the prospects of privatization in yet another way. As the growth rates of the domestic product and income at home started to decline, domestic savings were affected. In addition the recessionary conditions in neighboring countries affected the remittances of Jordanians working there and hence the national and disposable income in Jordan. With a stagnant national income and the prevailing gloomy outlook among businessmen and households, the willingness to invest in shares has subsided if not disappeared.

Domestic Interest Rates

The monetary authorities in Jordan adhere to a fixed interest rate principle. Interest rates are fixed by the Central Bank and changed only infrequently. The current nominal rate on time and savings deposits is set at 7.5 percent and 5.5 percent, respectively. Given the fact that inflation rates for the past two years have been around zero, the real interest rates in the country can be considered relatively high. This has shifted the preference of potential investors toward maintaining assets in a liquid form where the rate of return is high, and away from investment in shares. It is not only that shares pay lower dividends but also that there is little hope for their appreciation that effected this change in preference. As a result, it is not expected that the public will be very forthcoming when it comes to subscribing to the shares of a privatized public institution.

Middle East Volatility

The second category of potential investors in privatized enterprises comprises foreign firms and financial institutions. Although the issue of whether such investors should be encouraged to acquire equity in new corporations has not been settled, it may be that they will not be very responsive even if they were to be invited. One major reason for this is the perception of the Middle East as an area of potential military and civil disruption. For although Jordan has proved to be a very stable country—socially and politically—most potential investors associate it, by virtue of its location, with the Middle East in general, which is the scene of some national, social, and ideological strife. The Lebanese civil war, the Arab-Israeli conflict, and the Iran-Iraq war only help to consolidate such a belief.

Disengagement with the West Bank

In July 1988, the Government of Jordan announced, in response to demands by the Palestine Liberation Organization and Arab countries, a complete legal and administrative disengagement from the West Bank of Jordan. As a result a new definition of who is a Jordanian was reached. All Palestinians living in the West Bank are Palestinians and not Jordanians. All those living in the East Bank—even if they are of Palestinian origin—are Jordanians. A big cloud, however, still hangs over the one million Jordanians—the majority of whom are of Palestinian origin—who live in Saudi Arabia, Kuwait, and other GCC countries. This segment was considered to be a substantial audience for any flotation of shares in the country. They usually generate more savings than those living inside the country, and they show preference to portfolio investment rather than to direct investment as the former is easier to monitor and manage from abroad. In the short run, this category of potential investors may be alienated by the recent political moves, as they may face ambiguities about their national and territorial relationship.

The Privatization Plan

The discussion thus far underlines a basic fact: the Jordanian Government is locked into one rational path for the future as far as its ownership and participation in privatizable projects. This course is to go ahead and privatize with a systematic long-term view. The complicated technical, administrative, and logistical problems require the formulation of a strategy that needs clarity and resilience if it is to succeed. This plan may take the following course:

  • The gradual privatization of the small companies in which government equity is JD 1 million or less. Then it can move gradually to companies in which its share is within the range of JD 2–4 million. However, bigger companies in which the equity exceeds JD 5 million and up to JD 50 million must be privatized on a gradual basis. Meanwhile the Government should work on the design and ultimate adoption of a concomitant package to encourage both Jordanians working abroad and Arab nationals to buy such equity with sufficient guarantee that such investments will be allowed to operate with the maximum freedom possible.

  • The Government of Jordan can privatize about 19 government agencies which are currently run as government institutions with varying degrees of autonomy. Some of these institutions can be privatized immediately, especially those which started as companies but were eventually taken over by the Government and transformed into their current legal status. Other departments can be asked first to commercialize their accounts, then they will be changed from departments to government companies, and in due course government equity may be unloaded.

  • There are certain assets owned by the Government which can be rented to the private sector to be utilized. The Jordanian Government still owns most of the Jordanian land. However, the Government is gradually renting or turning over at nominal prices some of these lands to the private sector for agricultural and industrial uses. This process must continue and expand, particularly in underpopulated areas, to encourage investment and attract more people.

  • Some of the services which the Government is controlling can be relinquished to the private sector which would carry out those services on the Government’s behalf and under its supervision for a contractual fee. Examples are aforestation, road toll, standards and specifications, and laboratory testing.

It is expected that the total return to the Government from the sale of its investments over a ten-year period would be in excess of JD 700 million, which is roughly equal to 30 percent of its total foreign debt. It is advisable for such funds to be utilized to amortize commercial loans whose costs exceed 9–10 percent a year.

Conclusions

Privatization constitutes an integral part of liberalization. There is a great deal of evidence that the expansion of the Government into private sector domain has not been effective. The crowding-out effect did not appear significant during the boom years, but in periods of recession it looks as if the Government had its cake and was eating it too.

Yet the process of privatization cannot be treated on an ad hoc basis. It must be a well thought-out scheme with the permanence and perseverance to ensure its success. Moreover, it must be accompanied by other reinforcing government policies such as the encouragement of both domestic and foreign investments, price liberalization, and an attitudinal change within the hierarchy itself. If these were treated with sufficient political will, privatization in Jordan would contribute toward moving the whole economy into a new frontier.

Bibliography

A. References in English

B. References in Arabic

See John Vickers and George Yarrow, Privatization: An Economic Analysis (Cambridge, Massachusetts: MIT Press, 1988).

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